Did you ever hear about the guy who bought some stock in some obscure company at $5 per share? The stock went up just a little bit, maybe a 1/8th or a 1/4th (yes I am old and remember the old days) so he decided to buy a little more. Each time he made a purchase the stock seemed to go up so he kept buying and buying. Once it got through $10, he would buy and the thing would move 1/2 a point at a clip so he bought more and more. Then this sucker blew through $20 and this guy was excited! So excited, that he called his broker and put in several market orders at successively higher and higher prices until it hit $50…a TEN BAGGER from his initial purchase, what a “home run he thought.” You know the end to this story, he called his broker and wanted to cash out and reap the rewards…when he told his broker to sell everything, his broker asked, “To whom? You were the only buyer.”
So why bring this old fable up? Because this is exactly what the Fed and Bank of Japan are, were and thought they were doing. The Fed for example has been buying up to 70% of all Treasury issuance for the last couple of years and built a huge balance sheet. They thought that they could “lead” investors into buying their treasury’s bonds by “example.” They thought that investors would think that there is no risk buying the bonds because the central bank is there to keep up demand and keep prices up. They were right…for a while. But now we are seeing rates go higher and bonds being sold off. This only makes sense as I wrote the other day about Japan. Who would lock in 1% rates if the central bank is promising 2% inflation and quite likely MUCH higher?
Another question that I have heard only very sparingly is, “Who is the Fed going to sell their bond inventory to in any exit plan?” And there you have it, the biggest flaw in logic to date because the answer (just as in the fable above), because the central banks in both the U.S. and Japan have gone from “buyer of last resort” to “only buyer of any substance.” Who would be stupid enough to buy Treasury securities if the Fed itself is not only a buyer but turned into a seller. Of course, then you also have the “nuts and bolts” question of who COULD be a buyer? WHO would have the type and size funds necessary to accumulate trillions of dollars of Treasuries? Japan? China? No, they have already been used and abused. There is no one anywhere on the planet that will step up and replace the Fed’s (BOJ’s) buying power. Forget about the “ramifications” of a financial collapse in all markets were the Fed to “exit,” logistically there is no one left able to buy what the Fed doesn’t…much less buy from the Fed’s inventory.
I got some flak for writing yesterday about Larry Edelson being “right” this year for the wrong reasons. I might as well add Martin Armstrong to this list. What I wrote above is exactly WHY you cannot try to time the gold market. No one knows when the “human perception” will get around to understanding that the Fed has no way out. They have no “exit strategy” because there cannot be one. No one knows when this thing will snap and no one knows when psychologically the masses will figure this game out. All I know is that naturally and logically once “reality” hits home, paper currencies will be seen for what they are…worthless. Once it is seen as fact that the “emperor has no clothes,” the biggest financial panic of all time dwarfing all others combined, will result. It is your personal decision whether or not you want to play musical chairs, my advice is to leave the room and don’t play the game for your own safety. The end of this game is obvious on so many levels, if you do not or cannot see that and want to be part of the cheering section, then have at it. I seem to remember just a month back where Bostonians were chanting “USA, USA” while under martial law and having their homes invaded. Some will get what they deserve and others will deserve what they get…one side of the boat is completely loaded; I suggest that you take the other side.